Saturday 10 August 2013

Green shoots, animal spirits and sober assessment

As snippets of "good news" about improvements in the state of our economy begin to filter through commentators, particularly on the right, are already talking about  the "green shoots of economic recovery."   Given the ridicule which Norman Lamont's use of the phrase  generated way back in the 1990s, this could turn out to be something of an own goal.  Nevertheless, on the radio earlier this week I heard that the Daily Mail was proclaiming  that "Wow!" is now the only way describe Britain's economic vitality.

Keynes spoke of the effects of the "animal spirits" of entrepreneurs on the all-important levels of investment which generate employment and growth.  If spirits are low then investment levels are low and the economy stagnates. But if entrepreneurs are optimistic, then, indeed "Wow!" they will invest like crazy, the Keynesian multiplier will kick in and the economic Nirvana of growth with  full employment will become the order of the day.  (The government's headache then becomes to keep control of inflation and maintain a balance of external payments.)

So the good news is to be welcomed, and we must hope it will be continued and reduce the economic privations which the most vulnerable in our society have been experiencing. Any attempt to preach otherwise would be churlish.

Unfortunately attempts will be made to translate these signs of tentative economic recovery  into applause for a political success for the  George Osborne and the Tory party.  The grim truth is as follows:

  • this is not the beginnings of the  recovery the economy after the financial crisis of 2007-9; the economy was already recovering in 2010 when Osborne and the coalition took office:
  • the policy of "savage cuts" and the increase in VAT, the opposite of what Keynesian policy would advocate, helped to bring this recovery to a halt:
  • the  recession has therefore lasted longer than that in the 1930s and, indeed of any recession in the UK in the past 100 years:
  • Britain's  GDP, and therefore most people's incomes,  still remain below the pre-crash level:
  • by contrast, the US, where the Obama administration,  in spite of obstruction from Congress,  injected a Keynesian stimulus in the order of  $800bn through a combination of tax cuts and increases in government expenditure, has already returned to pre-crash levels
  • so have France and Germany, in spite of the troubles of the Eurozone.
There is no doubt that the right wing press and the Tory spin department will conveniently overlook the above, and  most people  will be happy to forget it if the "good times" seem to be returning. But the truth is that Osborne's policy of "expansionary contraction" has prolonged our recession, not cured it. The suspicion remains that it is not an economic policy at all, but an excuse to shrink the state.

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